Search Results
Journal Article
Evidence on the efficiency of index options markets
Index options have been one of the most successful of the many innovative financial instruments introduced over the last few decades, as their high trading volume indicates. Given their prominence, the pricing efficiency of these markets is of great importance. ; Detecting inefficient pricing, or mispricing, requires comparing a theoretically efficient price with prices of options traded in financial markets. One popular approach to deriving pricing relationships is based on a principle called no-arbitrage, which simply assumes that arbitrageurs enter the market and quickly eliminate ...
Journal Article
Competitiveness and price setting in dealer markets
The behavior of securities dealers has been closely scrutinized in the 1990s. Recent investigations of the National Association of Securities Dealers and the Nasdaq market by the U.S. Department of Justice and the Securities and Exchange Commission suggest that market makers colluded to fix prices and widen bid-ask spreads in attempts to increase dealers' profits at investors' expense. At a minimum, market makers appear to have adopted a quoting convention that can be viewed as anticompetitive behavior. ; This article explores the Nasdaq pricing controversy in light of economic theory and ...
Journal Article
Emotion and financial markets
Psychologists and economists hold vastly different views about human behavior. Psychologists contend that economists' models bear little relation to actual behavior. This view is supported by a large body of psychological research that shows that emotional state can significantly affect decision making. ; Economists, on the other hand, argue that psychological studies have no theoretical basis and offer little empirical evidence about people's decision-making processes. The reigning financial economics paradigm-the efficient market hypothesis (EMH)-assumes that individuals make rational ...
Working Paper
Institutional investors, analyst following, and the January anomaly
Studies have documented that average stock returns for small, low-stock-price firms are higher in January than for the rest of the year. Two explanations have received a great deal of attention: the tax-loss selling hypothesis and the gamesmanship hypothesis. This paper documents that seasonality in returns is not a phenomenon observed only for small firms' stock or those with low prices. Strong seasonality in excess returns is reported for a sample of widely followed firms. Sample firms have unusually low excess returns in January, and returns adjust upward over the remainder of the year. ...
Working Paper
A simultaneous equations analysis of analysts’ forecast bias and institutional ownership
In this paper we use a simultaneous equations model to examine the relationship between analysts' forecasting decisions and institutions' investment decisions. Neglecting their interaction results in model misspecification. We find that analysts' optimism concerning a firm's earnings responds positively to changes in the number of institutions holding the firm's stock. At the same time, institutional demand responds positively to increases in analysts' optimism. We also investigate several firm characteristics as determinants of analysts' and institutions' decisions. We conclude that ...
Working Paper
Bid-ask spreads in multiple dealer settings: Some experimental evidence
We report the results of an experiment designed to investigate the behavior of quoted spreads in multiple-dealer markets. We manipulate verbal communication (not allowed and allowed) and order preferencing (not allowed, allowed, and allowed with order-flow payment) between eighteen sessions. Without preferencing, spreads are wider when communication is allowed. With preferencing (and no order-flow payments), individuals do not have incentives to narrow the spread and a wide spread may be maintained without a collusive agreement. However, spreads narrow somewhat when individuals are given the ...
Working Paper
Time-varying volatility in Canadian and U.S. stock index and index futures markets: A multivariate analysis
We use a multivariate generalized autoregressive heteroskedasticity model (M-GARCH) to examine three stock indexes and their associated futures prices: the New York Stock Exchange Composite, Standard and Poor's 500, and Toronto 35. The North American context is significant because markets in Canada and the United States share similar structures and regulatory environments. Our model allows examination of dependence in volatility as it captures time variation in volatility and cross-market influences. Estimated time-variation in volatility is significant, and the volatilities are highly ...
Working Paper
The origins of bubbles in laboratory asset markets
In twelve sessions conducted in a typical bubble-generating experimental environment, we design a pair of assets that can detect both irrationality and speculative behavior. The specific form of irrationality we investigate is probability judgment error associated with low-probability, high-payoff outcomes. Independently, we test for speculation by comparing prices of identically paying assets in multiperiod versus single-period markets. When these tests indicate the presence of probability judgment error and speculation, bubbles are more likely to occur. This finding suggests that both ...
Working Paper
Uncertain litigation cost and seller behavior: Evidence from an auditing game
This paper reports the results of two experiments, each consisting of six sessions, designed to investigate difficulties that arise in estimating expected litigation costs in an auditing game. In each experimental session, the game consists of a series of periods in which sellers submit sealed offers to computerized buyers and, if hired, choose an effort level (low or high). The effort level affects the certain (direct) and uncertain (litigation) costs of performing the engagement. Across the two experiments, we vary the uncertainty surrounding the determination of the expected litigation ...